Intangible Assets and Analyst Forecast Errors

Abstract

We examine whether firms’ total underlying intangible assets and the proportion of capitalized intangibles assets are related to analyst forecast errors, using a sample of listed firms using IFRS on the European stock markets. Previous research has shown that firms with high levels of intangible assets are more difficult for analysts to forecast correctly due to the uncertainty and complexity of intangible assets. Furthermore, earlier research also show that capitalization of intangible assets lead to lower analyst forecast errors. This study is conducted on the European market between the years 2005-2015, examining all listed firms in Europe with available forecast data, resulting in a final sample of 20 285 firm-years. Data was collected from the Bloomberg database and the results show patterns similar to the ones found in previous research on the subject. We find that analyst earnings forecast errors are positively associated with firms’ levels of intangible assets, and negatively associated with the proportion of capitalized intangible assets over total underlying intangible assets. We also find that the latter association is more negative for firms with high levels of intangible assets compared to firms with no or low levels of intangible assets. Thus, the results suggest that intangible assets complicate the earnings forecasting task for analysts, and we find evidence that strongly suggest that capitalization of intangible assets provides analysts with valuable information that increases the accuracy of their earnings forecasts.